if you're lucky, D will appear close to one of four Fibonacci numbers. One last number, .886, helps validate the pattern. All of that gibberish means this pattern is complicated, and that makes it rare.
If you're handy with a slide rule (remember those?), then you'll be wasting your time searching for a bat. Even using a fancy electronic calculator will take too much time to find a bat. Use a computer with pattern‐finding software. I have a free one on my website called Patternz which will find this pattern and dozens of others. Try using it if you're serious about finding bats.
Even for a bearish bat, this example looks weird because of the uneven bottoms (A and C). Volume trends upward (E) when Table 4.2 says the average pattern shows a downward trend. As bad as this bat looks, it performs exceedingly well, with price dropping to F. This bearish bat is indeed bearish.
Figure 4.1 The five turns, X, A, B, C, and D, complete the bearish bat.
A swing trader taking a position just after D forms and watching the stock go all the way down to F might start dreaming about bats. Maybe even build some bat houses and hang them on his (or her) property. Here's a hint: a nearby pond is a plus. Let's return to trading bats. First, we have to find them.
Identification Guidelines
Table 4.1 shows identification guidelines. The guidelines are similar to other Fibonacci‐based patterns except the turns may use different numbers.
Figure 4.2 shows another example of a bearish bat.
Table 4.1 Identification Guidelines
| Characteristic | Discussion |
|---|---|
| Appearance | Looks like a big W with turns located by Fibonacci ratios. |
| BA/XA retrace | The ratio of BA/XA is either .382 or .5 |
| BC/BA retrace | The ratio of BC/BA is one of .382, .5, .618, .707, .786, or .886 |
| DC/BC extension | The extension of leg DC to BC is one of the Fibonacci numbers: 1.618, 2, 2.24, or 2.618. |
| DA/XA retrace | The ratio of DA to XA is .886. |
| Volume | Volume is downward the majority of the time, but this is an observation, not a requirement. |
| Duration | I limited patterns to 6 months, but this is an arbitrary limit I use for most chart patterns. |
Figure 4.2 This bearish bat sees price dip after D but still breaks out upward.
Appearance. My guess is that the name comes from the picture which forms when you connect turns XABCD with lines, but also includes lines connecting XB and BD. The pattern looks like two wings. When trying to visualize this, consumption of alcohol may be a plus.
As I mentioned, the pattern's turns are found using Fibonacci numbers. Let's go through this pattern to see how the bat in Figure 4.2 qualifies.
BA/XA retrace. The ratio of leg BA to XA should be either .382 or .5. Here are the prices used in the retrace or extension calculations for the bearish bat. The high price of point X is 56.93. The low at point A is 47.81, B peaks at 52.00, C bottoms at 49.71, and the pattern ends at D with a high price of 55.98.
To determine the retrace, I use the height (high–low range) of the price bar at the target to determine whether or not it spans a Fibonacci number. For example, the BA/XA turn using the high price of B would be (52.00 – 47.81)/(56.93 – 47.81) or .46. Using the low price at B (50.90) in the equation gives (50.90 – 47.81)/(56.93 – 47.81) or .34. The range .34 to .46 straddles the .382 Fibonacci number, so I allow it as a valid XAB turn.
Using this method gives a lot of leeway to the pattern's turns but even so, the pattern is rare. Trying to narrow the turn window would limit even more patterns from being found, so this is the algorithm I chose. The software you use may think differently.
BC/BA retrace. In a manner similar to the BA/XA retrace, I plugged in the numbers for the BC/BA retrace (using the low at C). They are (52 – 49.71)/(52 – 47.81) or .55. Using the high at C (51.65) gives (52 – 51.65)/(52 – 47.81) or .08. The range of .08 to .55 encompasses .382 and .5, so I allow the turn as valid.
DC/BC extension. In a similar manner, I find the DC extension of BC. That's (55.98 – 49.71)/(52 – 49.71) or 2.74. Using the low at D (54), we get an extension of 1.87. The 1.87 to 2.74 values straddle all of the listed numbers (any one of which will suffice) except 1.618, so it qualifies as a valid extension.
DA/XA retrace. Supposedly, this ratio is critical, so I allow point D to miss the number by 3% (.03). I do not use the high–low range of D in the equation and I use 3% instead of 1% because this pattern is rare enough as it is. We have (55.98 – 47.81)/(56.93 – 56.93) or .9. The .9 value is near the .886 target, so the pattern qualifies as a valid bearish bat.
As you can imagine, computing these ratios by hand is tedious and error prone, so I programmed my computer to find bats by first finding all peaks and valleys and then using the method described to glue them together.
Volume. I'll discuss a few volume statistics in Table 4.2, but volume trends downward in the pattern most of the time. With few samples, it's difficult to say whether up or down trending volume leads to better or worse performance, but current statistics favor a downward volume trend for the best performance.
Duration. I limited patterns to a length of 6 months or less. That's an arbitrary limitation.
Table 4.2 General Statistics
| Description | Bull Market | Bear Market |
|---|---|---|
| Number found | 537 | 128 |
| Breakeven failure rate | 17.7% | 4.5% |
| Average decline after D | –14.3% | –20.2% |
| Volume trend | 74% Downward | 67% Downward |
| Performance Up/Down volume | –14%U, –15%D | –20%U, –20%D |
Focus
